The Stunning Roadmap To $26,000 Gold

With many investors worried about the economic turmoil that has engulfed the globe, is gold headed to $26,000?

The Stunning Roadmap To $26,000 Gold
Stephen Leeb: “The Fed’s decision this past week to hold rates steady was no surprise. After all, going into the confab, the odds of a hike had been put at around 20 percent. And only two of the 23 market makers in government securities had any expectation rates would rise, and even those two said they weren’t really sure. Still, the markets exhaled, and a two-day rally in stocks, gold, and commodities followed, though it petered out by Friday…

Stephen Leeb continues: “But if the Fed’s decision to hold rates steady near zero wasn’t a big deal in itself, the nature of the vote was more significant. First, of the 10 commissioners including Fed chair Janet Yellen, there were three dissenters – an unusually high number. Most notable was Eric Rosengren of the Boston Fed. Rosengren previously was one of the most dovish members of the Fed, but he clearly had done a 180.

More Fed Propaganda
In explaining his vote, Rosengren commented: “The economic progress since the last tightening in December might, by itself, be sufficient to justify a further increase in the rate target……However, it is in considering the implications of current policy for the sustainability of the expansion that the case for raising rates has now become even more compelling.”

Wow. Whatever happened to Fed obfuscation. Here is someone who earned his stripes as a Fed researcher armed with a summa cum laude undergraduate degree, a Ph.D. in economics, and a career in both domestic and international research saying plain as day that the absence of a rate hike risks a recession. (Note that Rosengren, shortly after assuming his current post at the Boston Fed, gave a presentation in January 2008 in which he said AAA ratings on housing debt did not preclude default risks or a housing collapse.)

The most notable commissioner to go along with the majority against a rate increase was Stanley Fischer, the vice chairman. And this, too, is revealing. In comments leading up to the vote, Fischer had made it known he was hawkish. I highly doubt that he changed his mind about the merits of a rate increase. Rather, his assenting vote was almost certainly more a matter of politics than economics. Fischer is arguably the Fed’s most respected member. He has mentored leading economists including former Fed chief Ben Bernanke. A dual citizen of Israel and the U.S., he served as head of the Israel Central Bank for eight years of strong economic growth. He also was chief economist of the World Bank.

If Fischer had joined the dissenting doves, the big news story to come out of the meeting wouldn’t have been that the Fed held rates steady. It would have been that there had been unprecedented opposition to the majority that was led by its vice chair and most renowned economist. In other words, the story would have been of a Fed in chaos.

And a chaotic Fed, especially with Fischer leading the charge, would have been seen as a no-confidence vote in the entire body and could easily have engendered a chaotic outcome. So plaudits to Fischer for putting his thumb in the dike. Unfortunately, however, the economy is springing more than a single one leak.

The Fed’s main justification for holding rates steady is a lack of inflation. But that’s a fiction. Look at the chart below, which comes from the Cleveland Fed and depicts the median inflation rate, i.e., the rate at which prices of goods in the middle of a pack of goods are increasing.

Median Inflation Rate – Cleveland Fed

The current number is 2.6 percent, which is higher than the 20-year average and climbing. To say inflation has been tamed is nonsense. The only areas where inflation has been subdued have been commodities and especially oil and food. Ex out oil and food and virtually all measures of inflation are above 20-year averages.

Given that both food and energy are down for exceptional reasons and that both are nearly certain to rise, you can bet that overall inflation will start to climb, and at a rapid clip. The Fed is fiddling while the economy is starting to burn. A combination of inflation, rising oil, and lackluster growth led to the 2008 crash. We are moving into similar terrain very quickly.

As I advised last week, don’t make the mistake of seeing lackluster gold – which could even dip below 1300 in the weeks ahead – as a forecast of low inflation. In this political world, sharply rising gold would be too much of a political statement to make right now. If Western institutions such as the Bank of International Settlements, which have some, although diminishing, ability to affect gold’s price, were to let gold take its own course, it would already be moving dramatically higher and calling the monetary shots. But they won’t be able to hold gold back forever.

Gold To Be The New King Of The World Monetary System
In short the Fed is praying for a miracle, and there’s no miracle on the horizon. Gold is waiting in the wings ready to be anointed the new king of the world’s monetary system.

China totally gets it. The ascent of gold is the ascent of China. Recently, Caixin, a new Chinese vehicle, carried a seemingly innocuous article about the SDR. Tucked in the middle of the article was the following statement:

“The SDR is a special international reserve asset created by the IMF to supplement its member countries’ official reserves, as the supply of the two key reserve assets – gold and the dollar – proved inadequate for supporting the expansion of world trade and financial flows.”

Gold’s Ascent To $26,000There are a few hidden implications. One is that the Chinese regard gold and the dollar as sharing the same playing field with each other as reserve assets. Second is that the SDR, which the yuan will join shortly, is critical for maintaining international trade. Left unsaid is what role gold will play in the SDR, but the implications are that its role would be presumed to be on a par with the dollar.

Actually, when gold – as it inevitably will in some form or another, either on its own or as backing for the yuan – makes its way into the SDR, it initially will have a lower weighting. But history shows that gold has climbed over 20 times more than the SDR. I don’t want to say $26,000 gold, since that might make me sound like a nut. So instead I’ll just say that 20 times $1,300 is a very big number.”

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